Draghi says European Central Bank ‘comfortable with acting’ in June if needed: live blog recap

May 8, 2014, 9:37 AM ET

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Mario Draghi

European Central Bank President Mario Draghi signaled that policy makers could move as early as next month to further ease policy in an effort to fight off an overly prolonged period of low inflation. Here’s a recap of our live blog of Draghi’s monthly news conference and the market reaction to his comments.

Most economists had said they expected the ECB to leave rates on hold. But at the same time, many also see the central bank well on the path to further loosening in the future, warning that a rate move couldn’t be completely ruled out.

So the euro saw a pop to new highs when the ECB announced that it had, indeed, left rates unchanged for another month. The euro, which had changed hands around $1.3935 ahead of the announcement, now stands at $1.3955 after trading as high as $1.3961.

The main event, of course, remains Draghi’s news conference, where the ECB chief could announce the implementation of any number of other easing measures.

Many ECB watchers expect Draghi to keep laying the groundwork for further action, with many setting their sights on June, when central bank staff will update their economic projections. An expected downgrade to the inflation outlook could serve as the excuse needed to pull the trigger on any number of policy measures.

Here’s Jennifer McKeown, senior European economist at Capital Economics in London, in a note:

Even assuming that no such measures are announced now, we expect President Draghi to strike a very dovish tone, not least in an attempt to counter the persistent strength of the euro exchange rate. Those pressuring him to announce a specific ceiling or direct action against the currency (including the French and Spanish Prime Ministers) are likely to be disappointed. But the President should reiterate that an array of unconventional policy measures to counter the threat of deflation and address money market tightness remains under consideration.

Such action might begin with a relatively timid decision not to sterilise bond purchases previously made under the Securities Market Programme. But we expect more significant action, including small cuts in the refinancing and deposit rates and quite possibly a full blown QE programme, to come next month or soon after.

The ECB is headquartered in Frankfurt, but it takes its show on the road within the euro zone twice a year. This month, the ECB Governing Council met in Brussels. That’s where Draghi will be speaking from when he takes the podium in about 20 minutes.

With the euro knocking on the door of $1.40, analysts widely expect Draghi to keep a pretty dovish tone whether or not he pulls the trigger on additional measures or merely continues to hint. Here’s a take from Pemille Bornholdt Nielsen, analyst at Danske Bank:

Based on the latest communication from the ECB [the euro's strength] is clearly something it is concerned about and looking ahead it could lead to easing as Draghi has said ‘a further strengthening of the exchange rate would require further stimulus’.

We think the improved growth outlook and the decline in the unemployment rate were important arguments for the ECB not to cut rates today. Having said that we still think it is 50-50 whether the ECB will ease at the meeting in June where new projections are released.

It is still possible the ECB will announce other measures than a rate cut today. The EONIA O/N fixing was again above the refi rate yesterday and it could be that the ECB will try to mitigate the increase in the fixing through added liquidity. One of the instruments which have been discussed recently is halting the SMP sterilisation. However, this is not our main scenario and we think the ECB will remain on hold at least until new inflation forecast are released in June

Draghi says the “moderate recovery” of the euro zone economy continues to proceed in line with the ECB’s previous assessment. The ECB continues to see a “prolonged period” of low inflation followed by a “gradual upward movement” in inflation rates. That’s pretty much what he said in April.

Draghi doesn’t seem to be deviating too much from the tone he struck a month ago. He says risks surrounding the economic outlook are still skewed to the downside. He notes that labor markets are showing the “first signs” of improvement.

He credits the timing of Easter with allowing inflation to tick up a bit in April, but says inflation is likely to remain at current levels, well below the ECB’s target, in coming months.

At the same time, banks are still reporting “tight levels of credit standards” compared to historical levels, he says.

Draghi reiterates that it’s essential there be a further decline in distortions to the credit-transmission channel. He urges banks to take full advantage of the ECB’s asset quality review to bolster their balance sheets.

Is there agreement among ECB policy makers on what would make for a “too prolonged period” of low inflation?

Draghi says “too prolonged” is when the risk of a “de-anchoring” of inflation expectations is on the rise. So, its a combination of overly low inflation and the length of time it persists. The longer the period, the longer the risk of de-anchoring.

German bunds just popped on Draghi’s last comment about being comfortable with acting next month if needed. The 10-year bund
/quotes/zigman/4869083/delayedDE:DE10YT yield, which falls as prices rise, is down 2 basis points at 1.457%. The yield had been up a bit at 4.488%.

Bond yields across the euro zone are falling, and prices are rising, after Draghi says he’s ready for quantitative easing in June, if needed. The Spanish 10-year yield is down 6.5 basis points at 2.909%, and the Italian 10-year yield is also down 6.5 basis points at 2.951%. Both are at record lows.

The German 10-year yield continues to drop as well, now at 1.448%. Here’s what that chart looks like, courtesy of Tradeweb.

Draghi is asked if his comments about June marks the end of the era of the ECB never precommitting to future rate moves.

Draghi says he thinks that era ended a long time ago. The admonishment that the ECB “never precommits” to rate moves was often uttered by Draghi’s predecessor, Jean-Claude Trichet, often after he gave what appeared to be a pretty clear signal that a policy move was imminent.

That’s a wrap. Investors and economists went into Draghi’s news conference expecting the ECB chief to drop some dovish clues to the next policy moves.

They may have got even more than they bargained for. Draghi was pretty explicit about concerns surrounding the strength of the euro and how that contributes to worries about low inflation.

Of course, the key moment was when he said the ECB stood ready to act in June, albeit with the caveat that policy makers want to see the June update to staff economic forecasts. There’s a good chance those forecasts will show a further deterioration in the inflation outlook, economists say, which would seem to cement a policy move next month.

But there’s still room for caution. Stephen Pope, managing partner at Spotlight Ideas, says Draghi isn’t suggesting there will be action on June 5, but is instead offering a revamp of the “old and overused mantra that the ECB stands ready to act if needed.”

The euro responded accordingly. After coming within a whisker of $1.40 as Draghi began his news conference, it now stands at $1.3887.

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